The economist Milton Friedman continues to divide opinion from the grave. Admirers believe that his free-market gospel helped to spur the greatest surge of global entrepreneurial activity and wealth production in the last hundred years. His critics say he provided an ideological alibi for the biggest upward redistribution of wealth in living memory, with a devil-take-the-hindmost attitude towards the non-rich.

So when the University of Chicago, whose economics department has been an incubator for the free-market creed, announced in May that a new institute would be named in his honour, it set off a fierce intellectual skirmish.

Seven committee members were appointed last year to formulate a plan for a research centre on "economy and society": five were economists, the sixth came from the law school and the seventh was based at the business school (which opened a thriving London branch in 2005).

"The economics department is small, compared to some of its rivals," Lars Hansen, the interim director of the new institute, told the Guardian. This is a chance, he believes, "to reach out and broaden" its approach, resources, and influence.

The university is coughing up half a million dollars for start-up costs this autumn and is seeking $200m more. Anyone donating a million or more is offered "privileged access" to the institute.

But 101 tenured professors - 8% of the teaching staff - have petitioned the university's president, Robert Zimmer, to convene a meeting of all staff in the coming academic year to discuss the purposes of the institute. To which Zimmer has agreed.

Rich man's club

A distinguished anthropologist, Marshall Sahlins, is among those who fear that the institute will operate as "a rich man's club", and operate on the principle that "the people who have the most money have the most truth".

A fellow petitioner, Bruce Lincoln, professor in the department of religion, anticipates that the institute will generate "a symbiosis of a certain kind of donor with a certain kind of institute" in what he calls a "feedback loop" to help the wealthy to become wealthier at the expense of everyone else.

"This is a big departure from the mission of the university," Lincoln complains.

Hansen responds: "To set up an institute with no criticism from outside would be silly to us. That's not our ambition."

Friedman, who died in 2006, was one of very few economists to become a household name, partly due to writing in popular publications (such as Newsweek), partly because of several television series championing his market-knows-best ideology, and partly as a result of his enormous appeal to conservatives.

In postwar America, Friedman's market fundamentalism was regarded as lunatic-fringe stuff until Vietnam overspending, the collapse of the gold standard in 1971, stagflation and the oil crises. The problems seemed at least as much political in nature as economic.

In the 1980s, President Ronald Reagan invoked Friedman's anti-governmental philosophy as the answer to American economic woes - although Reagan heretically indulged in protectionism, corporate tax breaks and subsidies at the same time as he cut taxes and regulations.

The free-market case spread to Britain, too, where the prime minister, Margaret Thatcher, was an ardent supporter. She shared the dislike of Friedman and his followers for regulation, trade unions, the welfare state and public works.

Chicago boys

The institute debate reopens old sores on campus stretching back to a 1970s uproar about the "Chicago boys".

They were hardcore proponents of the free market, trained at the university principally by Arnold Harberger and by Friedman himself. (The latter also worked for General Pinochet in Chile, imposing free markets, critics say, at the point of a bayonet.)

Sahlins says that the purpose of the Milton Friedman institute seems to be to "make the university safe for free markets the same way that the Chicago boys made the world safe for free enterprise". Institutes named after controversial people do not always emulate their views, but the founding committee's mission statement sounds unequivocal: "Following Friedman's lead, the design and evaluation of economic policy requires analyses that respect the incentives of individuals and the essential role of markets in allocating goods and services. As Friedman and others continually demonstrated, design of public policy without regard to market alternatives has adverse social consequences."

The petitioners find this statement hard to square with reassurances of scholarly openness.

Committee member John Cochrane of the business school deems the lecturers' petition "drivel" and wonders "just what is it that you good-thinking guys and gals have against human freedom?" The centre, Cochrane insists, is conceived of "pretty explicitly as an economic research institute without a particular ideology".

Economist bloggers describe the petitioners as "pinks", "pathetic" and "driven by purest envy".

"That shows the contempt with which these people treat those who don't share their orthodoxy," Lincoln replies. "They feel entitled and dismissive."

Fraught atmosphere

Critics believe independent scholars would be unlikely to want to step into this fraught atmosphere. Most economists would give the new institute a wide berth, they fear.

A "really robust institute" would be one that explored all kinds of visions, Lincoln argues, and has a "place for Friedmanite theory within a larger spectrum".

He adds: "The centre contradicts the spirit of inquiry, openness and give-and-take that a university ought to be devoted to."

But the founding committee members say they are puzzled by all the fuss, and suggest that the petitioners are pushing against an open door.

· The committee report, lecturers' petition and other corespondance regarding the Milton Friedman Institute can be found here

Politics of research

· Building of the George W Bush library, museum and research centre is due to begin at the Southern Methodist University in Dallas next year. A 12,500-signature petition says the institute is "utterly unacceptable".

· The Hoover Institution, a neocon thinktank on the Stanford campus, in California, is not formally part of the university and has its own staff. Gary Becker, one of the founding committee members of the Milton Friedman Institute, is a member.

· The John M Olin Foundation pumped more than $300m into conservative scholarship before shutting down in 2005. This included John M Olin institutes at Harvard and Chicago.

· From 1970 to 2000, there was an increase from fewer than 70 to more than 300 thinktanks, with two-thirds of the new ones being conservative in orientation, according to Andrew Rich, author of Think Tanks, Public Policy and the Politics of Expertise.

· In 1996, donors gave $47.8m to liberal institutes, $169m to conservative ones and $319m to places of no identifiable leanings.

· Most partisan research centres are unconnected to universities. The Hoover Institution, Heritage Foundation and American Enterprise Institute, line up against the Institute for Policy Studies, the Progressive Policy Institute and People for the American Way, on the liberal left.